TMI Blog2012 (11) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... such kind proved by the A.O. thus as per the past history of the assessee, the Department has been taking the view that no expenses including the interest had been attributed to dividend for computing the deduction u/s. 80M - the assessee having non interest bearing fund as mentioned hereinabove and no nexus between borrowed fund and the investment having been established by the Department cannot help the Revenue - in favour of assessee. Long Term Capital gain - share transaction not routed through stock exchange - CIT(A) deleted the addition - Held that:- The A.O. had not brought on record any evidence or instruction which prohibits the off market transaction of shares. The assessee has routed these transactions from demat account. There is no prohibition in Income Tax law on such transfers of share. The shares were transferred at the market price on the date of transaction. There was no objection from the transferee that off market transaction is prohibited by the law. It is immaterial whether assessee has paid STT on these transactions or not but capital gain has to be calculated as per the provisions of Income Tax Act. The appellant had sold shares of GSFC to GSIL as per th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r A.Y. 2005-06 24.04.2009 for A.Y. 2006-07 respectively. The Revenue s Assessee s appeals and Assessee s C.O. were heard together and are being disposed of by way of this common order for the sake of convenience. ITA No. 624/ Ahd/ 2009 (A.Y. 05-06) 2. The effective grounds of Revenue s appeal are as under: 1. The learned CIT(Appeals) has erred in law and on facts of the case in deleting the disallowance of Rs.23,97,98,520/- made u/s. 14A of the IT Act, 1961. 2. The learned CIT(Appeals) has erred in law and on facts of the case in deleting the addition of Rs.38,26,20,327/- made on account of Long Term Capital gain. 3. The assessee is engaged in the business of extending financial assistant by way of Term Loan, Financial Services and implementation of joint and associates sector project in the State of Gujarat. The ld. A.O. made addition of Rs.23,97,98,520/- u/s.14A of the IT Act. The appellant had made investment of Rs.199.83 crores in various shares of the Company quoted or unquoted. During the year assessee had paid interest of Rs.60.61 crores on various loans taken to invest or to maintain the investments. Ld. A.O. had given reasonable opportunity of being hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed the interest expenses incurred for the earning the dividend and allowed the deduction u/s. 80M on the net dividend income received. In all the assessment years learned CIT(A) and upto A.Y. 1996-97 ITAT has deleted the disallowance made and allowed the deduction u/s. 80M on the gross dividend income received. Relevant finding of the Commissioner of Income Tax (Appeals) is reproduced hereunder for your ready reference : It is submitted that as shown above it is an established fact that all the investments made before 1997-98 are made from the own funds and no interest expenses are incurred for the same. The said facts are accepted by the Commissioner of Income Tax (Appeals) and Income Tax Tribunal also and hence provisions of section 14A is not applicable to the investment made before 1997-98. Accordingly we submit that the disallowance as proposed by you can not be made under section 14A as no part of the investment was made out of borrowed funds. We have to further state that the we have enough funds i.e. capital and non cash expenses debited to profit and loss account i.e. cash available for the investments in the tax free securities as shown below : Share ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ially allocate certain expenditure as having been incurred in relation to earning the income which does not form part of the total income. In absence of any finding that some expenditure were definitely incurred in relation to earning dividend income no artificial allocation can be made so as to disallow the same. In view of the above factual and legal position we submit that no disallowance as proposed by you need be made while completing the assessment. 3.2 The assessee's submission and justification made in respect of the proposed disallowance u/s 14A was considered in the light of the facts and circumstances involved and also the legal provisions of section 80M and section 14A of IT Act. After taking a holistic view of the above referred aspects, it is found that the assessee's contention is devoid of legal and factual grounds, therefore, the same is not acceptable for the following reasons: (i) Regarding the relevance of the CIT(A)'s decision, as relied upon by the assessee, it is felt that the same is not applicable in the instant case for the reason that the decision of CIT(A) of deleting the disallowance of interest expenses vis-a-vis the claim made u/s 80M of IT Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter considering the assessee's explanation, it is held that the stand taken by the assessee is not tenable and acceptable even on prima facie ground. In this regard, reliance is also placed on the decision of honourable ITAT Mumbai Bench 'SMC' in the case of ACIT Vs. Dakshesh S.Shah (2004) (90 ITD 519)- A.Y.98-99. The gist of the decision is reproduced as under: The assessee made investment in shares by obtaining borrowed loans. During assessment proceedings, the assessee claimed deduction apparently u/s.57(iii) in respect of interest paid on such borrowed funds. The AO noticed that dividend income was exempt from tax in the hands of the receiver, as per the provisions of section 10(33) rws 115(o). The AO held that since the income was exempt from tax, expenditure incurred for earning of such income could not be allowed. On appeal, the Commissioner (Appeals) allowed deduction. On appeal by the revenue: HELD Chapter IV, provides five heads of income, the first four being specific heads of income, whereas the fifth one is residuary in nature. Income or expenditure has to fall under a specific head of income in which event the claim of an assessee can be considered under suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was reversed and the order of the AO was upheld. 3.4 After considering all the facts and circumstances and Court s decision as narrated above, it is concluded that the provision of section 14A in respect of investment in equity shares is squarely applicable in the assessee s case. Accordingly disallowance on account of diversion of interest bearing fund towards investment having no taxable return in the form of equity shares has been worked out as entered in order sheet dated 7/12/2007 before the representatives of assessee. The total available fund (Interest Free as well as interest bearing) is Rs. 497 crore. Interest paid is Rs. 60.61 crore. Therefore the average cost of investment is 12%. The interest spent u/s 14A towards the investment for the purpose of earning tax free dividend of income is worked out as under: i) Investment in equity shares Rs.199,83,21,000 ii) Rate of interest (as calculated above) 12% iii) Total proposed disallowance Rs.23,97,98,520 In view of the above, the expenditure u/s 14A is estimated at Rs.23,97,98,520. This expenditure is disallowed for deduction from the computation of total income of the assessee. 4. Being aggrieved by the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 146 crores and Unsecured loan from 384 crores to 351 crores. Therefore, the CIT(A) order may please be confirmed. 6. We have heard the rival contentions and perused the facts of the case, there is no dispute to the fact that the assessee has raised the loan of Rs.297.75 crores up to 97-98 and majority of investment has been made before 97-98 and the assessee had been claimed deduction u/s. 80M of the Act. The A.O. in this year had made a disallowance of the interest expenses incurred for the earning the dividend. Whereas the ld. CIT (A) and the Tribunal in particular up to 1996-97 had deleted the disallowance so made along with the deduction u/s.80M of the Act on the gross dividend receipt. Though in such a situation, the interest bearing fund are bound to merge that the assessee in capital which is non interest bearing fund. There is no dispute to the fact that the assessee having non interest bearing fund as under: (i) Share capital Rs.256.97 crores (ii) Depreciation reserve Rs. 5.81 crores (iii) Provision for NPA Rs.110.86 crores Total Funds Rs.373.64 crores (iv) Investments Rs.199.83 crores In view of the decision of the ITAT, Delhi Bench, in case of Maruti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 200 71-72 100 200000 960000 275000 -685000 As far as the sale of Kirti Plastic is concerned, it is not actually a sale but redemption of redeemable preference shares which the assessee was holding for a long time. Therefore the question of any device in such redemption or question of non-payment of STT on such redemption does not arise. The dispute is therefore in respect of sale of GSFC shares only, which were deliberately sold OFF Market and on which STT was not paid by the assesse to claim the loss u/s 45 of I.T. Act. If this sale had taken place in Stock exchange, STT was payable. If STT is payable, the capital gain / capital loss arising from such sale would be exempt u/s 10(38) of I.T. Act. In that case assessee could not have claimed the loss of Rs.38.26 crore arising out of such transfer. The shares of GSFC were sold to Gujarat Sate Investment Ltd. (GSIL). In fact both, the assessee and GSIL are wholly owned subsidiaries of Government of Gujarat (GOG). Therefore it was a transfer between one subsidiary of GOG to other subsidiary of GOG. 2.2 It was further found that Off Market sales are not permitted by SEB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As far as the issue of "Off Market" deal is concerned, neither the Assessing Officer has been able to establish nor do I think there is any ban per se on such a deal. The demat form informing about the transfer of shares seems to have been designed to include such transactions as well. I also think that in case, such a ban has to come it has to come through the Companies Act and not through SEBI Act, which is primarily for regulation of the security exchanges. The factual matrix here is that the shares have been transferred from the appellant-company to M/s. GSIL at the market price prevailing on the date of transaction and the concerned company M/s. GSFC has taken that fact on record and the transferee-company has received the money from the transferor-company. The company M/s. GSFC, while transferring the shares, has not raised any objection to the manner of transfer, which under normal circumstances it should have, if such transactions were prohibited by law. 3.6. Regarding the strong exception taken by the Assessing Officer about the assessee having undertaken the "Off Market" transaction as a deliberate measure of saving S.T.T. and computing capital loss, in my view, thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angement with the intention to reduce the tax liability. As stated earlier, it does not appear that the assessee flouted any rules and regulations in carrying out this transaction- It is a standard practice, in any group or corporate or even individuals to encash the shares and realize the money in case of need of money. I do not think it has any tax avoidance angle as well. If similar amount had been taken as loan, assessee would have had to incur the interest expenditure as well. 3.9. Finally, the Assessing Officer's stand that the transaction will be considered as complete only when M/s. GSIL will sell it, does not seem to be a very sound proposition. It is not the case that the shares of M/s. GSFC have been handed over to M/s. GSIL on lien. With effect from the date of transfer of the shares, M/s. GIIC has ceased to be the shareholder i.e. extinguished it rights. Thereafter, as and when M/s. GSIL transfers the shares, consequences would have to be treated in their hand and sale by M/s. GSIL, whenever it taken place cannot be treated as sale or transfer of the assessee. 3.10 Therefore, considering all the legal issues and facts, I think the Assessing Officer has been unj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived amount of Rs.4,49,95,181/- towards the services charges from M/s. Reliance Industries Ltd. for verification of the party s project report for conversion of deferred sales tax into deemed loan from the appellant during the previous year relevant to assessment year 04-05. However, meanwhile the scheme of conversion of deferred sales tax into deemed loan stood withdrawn by the Government of Gujarat vide G.R. dated 17th September, 2005 due to which the appellant was entitled to receive the said amount. As per ld. A.R. of the appellant, there was no service rendered and no income could be accrued to the appellant but the said amount stood accounted for as income in the books of account and therefore offered for taxation during the assessment year 04-05 to rectify the situation consequent to issue to the G.R. The entry was reversed by the same amount by debiting the p l account during the previous year relevant to present assessment year i.e. 05-06. Further, while filing the return of income for the assessment year 05-06, the appellant suo moto disallowed the amount of Rs. 4,49,95,181/- towards reversal of service charges income. The claim for deduction of such sum had already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of own funds while adjudicating on issue of deduction u/s.80M of the Act. It is submitted it be so held now. 2.1 The Commissioner of Income Tax (Appeals) erred in holding that Rule 8D of the Inocme Tax Rules, 1962 (hereinafter referred to as the Rules ) is retrospective in its application in view of Mumbai Tribunal Special bench decision in the case of ITO vs. Daga Capital Management (P) Ltd. (119 TTJ 289) without appreciating the facts of the case. It be so held now. 2.2 The learned CIT(A) failed to appreciate that when there was satisfaction as regards investments in tax free securities out of owned funds provisions of sub-section (2) and (3) to section 14A of the Act cannot be invoked. It is submitted that it be so held now. 2.3 The learned CIT(A) has erred in upholding disallowance of Rs.13,74,01,132 in light of facts the learned CIT (A) has deleted the disallowance made for AY 2004-05 A.Y. 2005-06. It is submitted that the fact that investments have been made out of owned funds and no borrowed funds have been used and there is no fresh or additional evidence which require deviating from the stand taken for A.Y. 2004-05 2005-06. It is sub kitted it be so held no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the facts of the case, I hold the disallowance u/s.14A is called for. The Assessing Officer may apply rule 8D to make the computation for the disallowance. 18. Now the assessee is before us. The ld. Counsel for the appellant contended that the exempted dividend income earned from the investments made prior to 97-98, when the appellant was generating good amounts of profits and has sufficient amount of owned fund. Interest bearing funds have not been utilized for the purpose of making investments. Own funds which comprising of the share capital plus post tax cash profits till date more than investments. The value of share capital during the year under consideration is itself Rs.256.98 crores as against investment of Rs.157.72 crores which evidently shows that the company has made investments out of its own funds. In all the earlier assessment years, the CIT(A) and upto A.Y. 1996-97, the Hon ble ITAT has deleted the disallowance made by the A.O. of the interest expenses and allowed the deduction u/s. 80M on gross dividend basis. The manner of investments is a business decision and should not be questioned in absence of any material to the contrary. The investments have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... race Paper Ltd. Torrent Gujarat Bio Tech, the appellant had sold shares off market. The ld. A.O. observed that the appellant used as a means of tax avoidance by claiming loss and carrying it forward to the subsequent years to set off against the income of the subsequent years, the claim of the appellant of treating such loss arising out of a genuine transfer is not allowable. He also found that another share of Rs.32,20,63,312/- was sold through stock market on which STT was paid and claimed exemption u/s.10(38) of the IT Act. Therefore, the long term capital loss of Rs.12,56,58,640/- was not allowed to carry forwarded to the subsequent year. 24. The assessee carried the matter before CIT(A) who has allowed the appeal by observing as under: 3.3 The matter has been given due consideration. The issue of whether the transactions done off market would tantamount to valid transactions and whether the assessee would be entitled for long term capitral loss in the face of having not paid S.T.T. stands already discussed in detail for assessment year 2005-06 by the undersigned. As stated therein, I do not think an assessee is precluded from doing an off market transaction and i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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